It is said that you need both hard work and good luck to get your business up and going. However, it must be remembered that due diligence is the mother of good luck. If you already have a startup or are planning to get one going in the near future, there are a few facts you have to keep in mind.
Many startups have gotten into serious trouble because they made some very common legal mistakes. Starting a business is not an easy task. Just having a team in place and a robust idea is not enough. You will have to have your legal aspects in place in order to make your startup thrive.
Here are the 5 legal mistakes that a startup must avoid:
1. Choosing the wrong corporate entity
Various types of business forms are available to a startup. The key is to choose the correct one. Some of the forms that are available are:
- Sole proprietorship
- General Partnerships
- C corporations
- S corporations
- Limited Liability Company
- Limited Partnerships
It is best to form an LLC or a corporation. That way you can limit your personal liability meaning, your personal assets will be protected even if your company gets sued or goes bankrupt. The only money you will risk losing will be the amount you put into your company. Your house, bank account, car, and other personal things won’t have to be on the line.
2. Not protecting intellectual property
One of the most valuable assets of a company is its intellectual property. You may have come up with the ‘next big thing’ but it won’t be of much use to you if you don’t exercise proper control over it. Intellectual property can be anything from your products, ideas, processes, company name, logo, etc. Here are a few forms of intellectual property protection to consider:
- Patents: This is used to protect a new, non-obvious, and useful invention. The owner will have exclusivity to make and use the invention for 20 years.
- Trademarks: Important things to trademark would be your company name, logo, specific product names, and slogans. It will prevent competitors from using the same names.
- Copyright: Copyrights help in protecting creative work like works of art and writings.
- Non-Disclosure Agreements: If you share confidential information with anybody outside the company, you will have to make that person sign a non-disclosure agreement. It is important if you happen to work with a contractor or a consultant.
3. Not having proper documentation with employees, vendor and other
“If it’s not on paper, it didn’t happen” and that is exactly why you should have every agreement, terms and conditions properly documented. The types of employment documents are:
- Employment agreement: it sets forth terms of the relationship of the employment
- The employee handbook: This will lay out the policies of the company, including employee benefits, sick leave, vacation time, etc.
- Stock options or restricted stock purchase agreement: This is for issuance of shares of the company
- Employee authorization and withholding allowance certificates
Proper documentation is required when it comes to co-founders too. Who are the founders, what percentage of the company do each of them own, what their roles and responsibilities are, etc. should be properly documented. Create proper contracts and get your vendors to sign them too.
4. Not complying with security laws when issuing stock
Most security laws require for the sale of shares to comply with certain disclosure filing and form requirements unless the sales are exempt. Documenting the sale of shares in compliance with laws is extremely important. If not done properly, there will be fines, penalties, and repurchase requirements.
5. Hiring experienced legal counsel
All this legal language might have baffled you, which is one of the reasons why you should have an experienced lawyer who will advise you on your startup and be with you through every step. You cannot avoid every issue that comes your way especially legal ones and there are going to be plenty. Hence, it is imperative for new businesses to reach out to any good law firms for startups in India.
Make sure the legal help you hire has expertise in contract law, employment law, real estate laws, tax laws, franchise laws, and corporation, commercial, and securities law. One lawyer might not be an expert on all of the above. You can seek out various law firms and various lawyers as per your needs.
Avoiding these 5 legal mistakes can help your startup float and turn into a very successful business.